RPM International Inc (RPM) 2004 Q1 法說會逐字稿

Good day and welcome to the RPM International's conference call for the fiscal 2004 first quarter conference call. Today's call is being recorded. This call is also being webcast live and can be accessed through the RPM website at www.RPMINC.com. A taped telephone replay will be available from two hours after this call concludes until 8:00 p.m. eastern standard time on Wednesday, October 15 and can be accessed by dialing 719-457-0820 and entering confirmation code 710273. A webcast replay and written transcript will also be made available through the RPM website. The webcast replay will be available approximately two hours after this call ends.

The written transcript will be available two to three business days after the call concludes. Comments made on this call may include forward-looking statements based on current expectations that involve risks and uncertainties that could cause the results of RPM to differ materially from management's current expectations. For more information on these risks and uncertainties, please review RPM's quarterly earnings releases and periodic reports filed with the Securities and Exchange Commission. The information in this conference call related to the projections or other forward-looking statements may be relied upon subject to the previous Safe Harbor statement and may continue to be used while this call remains on the active portion of the RPM web site.

During this conference call, RPM spokespersons may reference non-GAAP financial measures. To assist you in understanding non-GAAP terms, as well as to comply with the SEC requirements, RPM has posted reconciliations to their most directly comparable GAAP financial measures, including disclosures on the reasons for their use of non-GAAP measures, on the company website in the Investor Relations section under conference calls/presentations. At this time, I'd like to turn the call over to RPM's President and Chief Executive Officer, Mr. Frank Sullivan for opening remarks. Please go ahead, sir.

Thank you, Shawna. Good morning and welcome to the RPM International, Inc first quarter conference call. We are pleased to report record results for our 2004 first quarter ended August 31, 2003. This morning, Glenn Hasman, RPM's Vice President of Finance and Communication, will provide a review of our financial results. Afterwards, I'll update our asbestos liability situation and provide some comments on our acquisition activity as well as our outlook for the second quarter and the balance of the year. Glenn?

Thank you, Frank, good morning, everyone. I will review first quarter results through the income statements. This year's first quarter net sales grew 9% or $48 million over last year to a record first quarter sales level, as Frank mentioned. The organic sales growth was up 6% or $29 million, including net favorable foreign exchange effects, mainly against the euro and the Canadian dollar. Eight smaller acquisitions during the past 12 months added the remaining 3% or roughly $19 million of net sales growth. By segment, industrial segment net sales reached $316.2 million or 54% of the RPM total, which grew by 8% or by $24 million year-over-year.

Organic industrial segment growth was 3% or roughly $10 million, including net favorable foreign exchange effects. Excluding those foreign exchange effects, the organic industrial sales were essentially flat this first quarter, as this side of our business has yet to see definitive signs of business upturn. Meanwhile, we're busy securing new business and growing market share where we can. Also, our roofing maintenance services revenues continue to grow rapidly and are on track to reach our planned for sales levels in this strategic business category.

The balance of our industrial sales growth comes from five smaller acquisitions, including the Coke acquisition on April 1 of this year, which added $14 million or 5% of net sales growth in this segment. Consumer segment net sales reached $273.9 million or the remaining 46% of RPM and grew by 9% or $24 million year-over-year. Organic consumer segment growth was up 8% or $20 million, including also net favorable foreign exchange effects. Our main product lines of Zinsser, Rust-Oleum and DAP all showed solid growth year-over-year.

The balance of consumer growth comes from three smaller acquisitions, which added $4 million or 2% of net sales growth. Moving down the line to gross profit, the gross profit margin of 46.8% this year compares with 47.6% last year. The leverage benefits from our higher organic sales volume were more than offset by a number of higher raw material and packaging costs this quarter, including oil-derived materials such as acetones and solvents, which we had previously indicated was likely to occur this quarter.

In addition, we had growth continuing in certain strategic but lower margin product lines and services. By segment, the industrial segment gross margin year-over-year declined to 47.3% from 48.1% a year ago. This is primarily from the effects of certain changes in sales mix, including the continued growth and strategic but lower margin services in this segment and from differences in the mix of certain product sales such as roofing. Consumer segment gross margins year-over-year declined to 46.2% from 47%.

Despite positive leverage from the much higher organic sales volume in this segment and their ongoing cost reduction efforts, this margin decline is mainly the result of higher raw material and packaging costs affecting mainly this segment and these higher material costs are being managed and not expected to be as significant a factor for the remainder of this fiscal year. Moving down to selling, general and administrative expenses, or SG&A, those were improved by 50 basis points this quarter at 33.2% of sales from last year's 33.7%. Generally this reflects the positive leverage from our higher sales volume, especially the continued growth in industrial services sales that require much lower SG&A support, along with ongoing cost reduction and containment efforts across the segments.

Sensing upcoming improvement in business confidence and a recovery in the economy in general, certain marketing and growth related investments were made this first quarter in both operating segments, partly offsetting these benefits. By segment, the industrial segment SG&A was 32.4% of sales this year compared with 32.7% a year ago, improved by 30 basis points. This is essentially a reflection of their higher organic sales volume and cost reduction initiatives during last year that are benefiting this year. Some partial offsets in the industrial segment were growth-related investments we've been making, as mentioned, and higher reserve accruals associated with our exterior insulating finishing systems litigation and those higher costs may continue.

Consumer segment SG&A was 30.9% of sales this year, compared with 31.2% a year ago, also improved by 30 basis points. They also benefited from higher organic sales volume, plus ongoing cost reduction and containment efforts. We did have partial offsets in this segment, as well, as they, too, have made growth related investments in certain major emphasized product lines that Frank will talk more about. Corporate other expenses decreased to $9 million this year from $9.5 million last year.

We did have asbestos related product liability costs a year ago approaching $2 million versus none this year. The asbestos charge that was taken this past fiscal year end is again estimated to cover approximately three years worth of these related costs. In addition, we did have year-over-year savings associated with the recent management retirements. As partial offsets, we did have generally higher insurance costs this year. Earnings before interest and taxes or EBIT reached $80.2 million this year, that's improved by 7% or just over $5 million from last year's $75.1 million.

That reflects the positive result of the higher sales coupled with the cost reduction and containment efforts in both segments. A slight margin decline did occur, however, to 13.6% of net sales from 13.8% a year ago, the result of a slightly lower gross margin for the reasons discussed earlier. By segment, the industrial segment EBIT was $47 million, improved by $2 million or 4.5% on 8% sales growth, which amounts to 14.9% of sales in this segment, compared to last year's $45 million of EBIT or 15.4% of sales. Consumer segment EBIT reached $42.1 million this first quarter, improved by $2.6 million or by 6.5% on their 9% sales growth.

So, that amounts to 15.4% of sales compared to last year's $39.5 million of EBIT or 15.8% of sales. This combined operating EBIT improvement, which totals $4.6 million or ahead 5.4%, is generally the result of the growth in sales, including the accretive results of our recent acquisitions, partly offset by the higher raw material costs this quarter and a number of the growth related investments we've elected to make as we head into what we believe will soon be an economic recovery. Moving down the line to interest expense net, that was down this year by $0.9 million dollars. Mostly that's the result of continued lower interest rates, averaging during quarter-over-quarter about 46 basis points improved.

That generated about $0.7 million dollars of savings. The average rates this first quarter were about 3.5% compared to last year's average rates of about 4%. We did have some slightly higher investment income performance quarter-over-quarter, offset slightly by higher average borrowings this year, associated strictly with our recent acquisitions, which resulted in slightly added interest costs. The tax rate this first quarter was 35.5%, that compares with last year's 34.9%. You're still seeing the gradual but steadily diminishing benefits from the adoption of FAS 142, for us that was on June 1, 2001.

There's also an anticipated slightly different mix of income we're expecting through the business geographically, which is driving the slightly higher rate. Our net income, then, was ahead 8% or by $3.5 million, year-over-year. The margin on sales remained a strong 8.1% both periods despite the slight gross margin decline. Diluted earnings per share reached 41 cents from last year's 38 cents, also ahead 8%. Moving to the balance sheet, I think you will notice that we've included a full balance sheet with our earnings release this time, which we trust is helpful to a number of you.

I still want to give some help with detail, particularly comparing back to August of last year, given our seasonality. Net accounts receivable were up by $34 million year-over-year. That reflects sales increases in both segments, including acquisitions and that accounts for almost $25 million of that increase. The balance is foreign exchange translation effect, which alone accounts for an additional $9.2 million year-over-year. Days outstanding in receivables are slightly improved year-over-year in this category.

Inventories were up by $0.8 million dollars. Foreign exchange translation effect alone accounts for an increase in inventories of $5.7 million year-over-year. So, actually inventories were down year-over-year by $4.9 million or by 2% with days outstanding in inventories improved by 6 days in the industrial segment, 9 days in the consumer segment or by greater than 7 days lower in total or averaging approximately 10% improved year-over-year. That reflects our efforts that are ongoing to continually economize our inventory levels, much of which is in connection with our ongoing class "A" efforts.

Accounts payable were ahead year-over-year by $12.5 million. Here again, foreign exchange translation accounts for a $3.2 million of that increase. The difference comes from the combination of business growth and timings of payments in both segments. Total debt year-over-year, $730.2 million, which includes the short-term portion. That's up $13.9 million entirely related to acquisitions. The total debt to capital remains, however, at 45% and our available liquidity as of August 31 was $473 million. Our liabilities related to asbestos deserve from mention. Our current liability in this category remains at $41.6 million since May 31.

That's up from $3.6 million a year ago. That represents our estimated payments required during the next 12 months related to our asbestos liability as the related insurance backing this program did, in fact, exhaust during the first quarter of this year. Under long-term liabilities you will see $95.3 million related to asbestos. That's down from $103 million at May 31, that reflects payments of $7.7 million during this first quarter, net of the remaining insurance that I mentioned and that represents our estimated balance of payments that may be required beyond the next 12 months. Cash flows. Our cash flow from operations was improved year-over-year by $4.7 million or by 21%. That reflects our improved operating and working capital performances year-over-year.

Capital expenditures were slightly ahead of last year but still well within our depreciation range. Free cash flow generation these first three months, and we define that as cash flows from operations, less capital spending and less dividends, amounted to $4.9 million this year, up $2.4 million from $2.5 million a year ago. Notably, that does include the $7.7 million of pretax payments against our asbestos liability or roughly $5 million after tax.

Otherwise, our cash flow from operations would have been ahead $8.7 million or by 38% year-over-year and free cash flow would have amounted to $9.9 million or up by $6.4 million from the same period last year. I will now turn the call back over to Frank Sullivan.

Thank you, Glenn. I'd like to start off by addressing our asbestos liability and give you an update on that. First quarter gross settlements were approximately $17 million and are roughly equal to the same gross settlements amounts last year in the first quarter. These are also consistent with the assumptions which underscore our asbestos reserve. Active cases at August 31, 2003 of 2,131 cases are down slightly compared to active cases last year at this time of 2,154.

We expect gross costs for this fiscal year to be somewhere in the range of $40 to $50 million or approximately $25 to $30 million after tax. As we have discussed during our last conference call, the full impact of state tort reform measures will not be evident until the spring or summer of 2004. We are, however, seeing positive impact of some of these tort reform measures at the state level as we have not received, for instance, any new filings in Ohio or Mississippi over the last couple of months and only a handful of new cases have been filed in Texas.

Illinois continues to be a challenging state for RPM and all asbestos-defendant companies. As it relates to the pending legislation, in addition to recent state tort reform in Texas and Ohio specifically related to proportional liability, there is now specific asbestos reform legislation in each of these states that is being worked through both state legislative bodies. Federal legislation is continuing to receive a lot of attention in Washington. Our read is that Senator Frist, Senate Majority Leader, will decide in the next couple of weeks, whether to bring the Fair Act to the Senate floor any year or put it off until sometime after January 1.

Moving on to acquisition activity, during the quarter, acquisitions contributed about $18 million of revenue growth or 38% of the total revenue growth in the quarter. Net of interest expense acquisition costs and taxes, this added about 1 cent per share. On June 30, we completed the acquisition of Boral Technologies for approximately $13 million. Boral is a $18 million construction chemical and ad mixture business that will operate as part of the Euclid Chemical Division of our Tremco unit.

We're continuing to pursue a number of small product line acquisitions for both industrial and consumer companies in North America and Europe. From an outlook standpoint, we're continuing to experience strong growth in our consumer segment as a result of an expanded housing base and the successful introduction of new products. We are investing in a number of growth areas as Glen mentioned. Just a couple of examples here are Epoxy Shield product line, it is a two-component garage floor coating. It was a product line we acquired four years ago for about $2 million.

We ran our first national ad program, which kicked off over the Labor Day weekend and this year we expect to sell in excess of $15 million of Epoxy Shield. We're also investing in an expanded sales and service force at our Zinsser operation. And these are just two examples of some of the investments in growth that we are making in our consumer businesses. Our industrial businesses continue to be challenged by a lack of major project spending and the continuing recession in the U.S. manufacturing sector. Nonetheless, we are also investing selectively in growth areas here, specifically in our WTI roofing and waterproofing services business as well as a new fire stop and fire proofing sealant product area, also part of Tremco.

For the second quarter, we see single digit revenue growth -- high single digit revenue growth continuing and we will also start to see income growth levels equal or exceed revenue growth levels as some of the initial spending was targeted in the first quarter and we're also managing some of the raw material issues better as we go forward for the balance of the year. We remain on target for a year of earnings growth in the 10% - 12% range and are pleased with the results that we've had year to date. With that we would be pleased to answer any questions you have about our results or our outlook.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone phone. Also, if you're using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you would like to ask a question. We will pause for just a moment. And we will go first to Rosemarie Morbelli with Ingalls & Snyder.

Good morning.

Good morning, all and congratulations for a good quarter.

Thank you.

You gave us revenue growth for both of your categories and the overall business, but could you split pricing and currency so we actually get a better feel for what the volume was?

The pricing on a consolidated basis was pretty negligible, so the volume numbers are accurate. The majority of the growth in the consumer business was internal growth, absolutely. While in the industrial business, while we had 3% organic growth, the majority of that was as a result of foreign exchange translation and actual volume growth when looking at the segment on a consolidated basis was flat.

Okay. So price, nothing much in either category, it was not up in one and down in the other, therefore, ending for the company as a whole as flat?

That's correct. And there are a few tweaks here and there, but nothing material and on a consolidated basis, it's flat.

Okay. You also mentioned in the release that your raw material costs increased during the quarter. What would have been the gross margin if they had been flat with last year's? Do you have a feel for that?

I do not. Maybe Glenn can answer that.

Rosemarie, yes, about 0.5% of sales would have been the improvement had we not had those higher costs this quarter.

Okay. So it still would have been lower than last year?

It would have been very close.

Very close. The other difference,I think, were about 8/10 difference, the other difference there would be the mix of sales that we've talked about.

As we've talked about in the past, Rosemarie, the WTI business, which is one of the few areas of growth in our industrial business, carries the significantly lower gross margin than our product-related businesses.

Okay. And could you touch on the trends during the quarter, during this quarter and what you are seeing going out on the raw material side and on selling price increases?

I do not anticipate, on a consolidated basis, that selling price increases will have much of an impact on us this year. We will have some tweaks here and there and a few product areas, but nothing material. On the raw materials side we've seen some of the raw material pressure mitigate a little bit and I think we've had the ability to manage that a little bit better going forward. So, barring big spikes in oil prices or some type of probably geopolitical driven issue, we do not anticipate increases in raw materials so we think we will be able to manage this better for the balance of the year.

And therefore does that translate into improved gross margin year-over-year for the next three quarters?

I can't say that at this point. Certainly the rise that we experienced in a couple categories has ended and I think we've seen some of those prices be mitigated, but we really have to get through the quarter, Rosemarie, to tell you if we're going to be equal to or better than last year. Clearly we were not in the first quarter.

Okay, and last question on the working capital. Your inventories -- well, all right, including currency, were up a little otherwise were down. Did you make any progress in any other categories worth talking about?

Yes, we did. I think we picked up a day or two in days receivables and we picked up, I believe, 6 days 10 days --

10.

We picked up significant improvement in inventory. We are continuing to pursue operational improvements factory by factory across our businesses and I think the simplest way to see that in our financial statements is our ability to grow revenues and in this quarter, pretty significantly. And continue to do so on a lower inventory level.

Thanks, I will get back in queue.

Thank you.

And just a reminder that is star 1 if you have a question. We will go to Saul Ludwig with McDonald Investments.

Thank you, good morning, guys, great quarter.

Thank you, Saul. Good morning.

Good morning. A couple of knicks and knacks. What was the FX component of the consumer growth, Glenn?

The FX component there was about $4 million.

So that would be --

Less than 2%, Saul.

Okay. About 2%. Okay.

More like 1.5.

Okay. That was very strong. Your consumer business.

That's correct.

And did you notice has that continued through September? We've heard good comments out of the big boxes and have you seen that same good strength continue?

I think as I made in my comments, I think we will see for the second quarter, continuing high single digit revenue growth on a consolidated basis and I guess I'd prefer to wait for the second quarter to give you the details of what that actually is. But we're continuing to see the same type of growth in the second quarter that we experienced in the first quarter and the balance is relatively the same. Our consumer is doing fairly well and our industrial segment is continuing to be flat to slightly up. We think we're picking up some market share in that regard because in a lot of major areas there are still a real weakness on major projects and not much spending out of a lot of the major industrial areas that represent the type of big project work that we and a lot of other companies are involved in.

Next question on asbestos -- thanks for a good rundown -- you mentioned that you're -- reliving of your reserve was, let's call it roughly $8 million. And that your gross elements were $17 million. So, would that imply that $9 million was still kind of covered by the insurance and then your 10% of that would have been $900,000 so there really would have been some asbestos expense related to the insurance program?

No, in the quarter -- your assessment on insurance is correct, but in the quarter we used up the balance of our remaining insurance subject to this lawsuit we have in federal court, which will take some time to be resolved one way or another. But at that point, there is no longer a 10% as we've explained. The balance of the asbestos costs will come out of the reserve that we took at year-end.

So, if you had $17 million gross cost, was there anything unusual that makes you think that the subsequent quarters won't track at the $17 million a quarter rate, which would be much higher number than 40 to $45 million are for year.

If you look at our gross costs last year, they were roughly 16 and change. And so, oddly enough, our asbestos costs and caseload have fallen into a seasonal nature and you can see that over the last couple of years. I can guess at the seasonality of it, it tends to be seasonal around holidays and things like that. So, this is not an indication of what we expect in the coming quarters and also, as I mentioned, we have seen a very good meaningful trend over a 45 or 60-day period in some key states. Now, 45 or 60 days don't make the year, but we have not seen any new filings in the last couple of months in Mississippi or Ohio and we've only received a handful of filings in Texas. So, the caseload that we are working off in almost every sense are cases that were filed prior to some of these state law changes.

Do you know the total number of cases that you settled or dismissed in the quarter were?

I don't have that number. It will be published in the 10Q.

Okay. You also mentioned there, Frank, about the -- included in the corporate expense, some additional reserves relative, it must be, to drive-it.

That's correct.

Can you bring us up to speed? What was the magnitude of those? What's likely to continue? And where does this whole drive-it thing stands? We thought this was going to be sort of resolved by now?

No, the national class action settlement, or drive-it, is still pending. It was approved by a judge. It was appealed. Most of the issues associated with the appeal are now completed. There is one plaintiff that is still appealing and there is a hearing on that and whenever the judge gets around to it then we should have a final agreement that has remained unchanged for many, many months now, which will be a final resolution on a national class action basis of the drive-it situation. We have increased our reserves for drive-it by approximately $3 million on an annual basis.

And should we look at this $9 million corporate number as kind of a proxy for what that expense should be in the ensuing quarters?

I think that's roughly about where we'll be for the balance of the year. Uh-huh.

And then just finally, in the flow of funds statement, is the asbestos cash included in that item that you call items not affecting cash and other --

Yes, yes it is.

So the terminology items not affecting cash, it really was affecting cash?

Well, that's part of the other part of that category, Saul.

It's items not affecting cash and other.

And other. So...

So, that's where your cash out net of taxes will be for asbestos?

That's correct. And that's a net figure but that's reflected as a cash hit.

So $5 million of that $7 million was the asbestos?

That's correct.

I'm with you. Okay. I think that -- oh, and then finally you talk about this new product, I've seen the ads, by the way, for the garage floor paint, I'm ready to go out and buy it here.

You should!

If you do the $15 million, how would that compare with last year? Would that be compared to next to nothing?

I don't know. It will be up substantially. I know four years ago it was a $2 million product line.

Okay. Great. Keep up the good news.

Thank you, Saul.

And a final reminder, that is star 1if you would like to ask a question. We will go to Jeff Zekauskas with JP Morgan.

Good morning, Jeff.

And your line is open.

Good morning, this is Silke Keuck for Jeff Zekauskas. How are you?

Good morning, Silke.

I think Saul did a good job asking most of the questions I had. So, just as a little follow-up, what do you expect your tax rate to be for the year?

About the same, Silke, about the 35.5%.

35.5%, okay. And can you quantify out of like the cash outflow for the asbestos charge, how much of that was covered by insurance? Was it still like a month's worth, like roughly a third or was it more or less than that?

It was about $9 million in the quarter.

Okay, so it's then 17 minus 8 is 9. Thanks very much.

Okay.

And now we have Greg Halter with LJR Great Lakes Review.

Good morning, Greg.

Good morning, guys. Very good detail on the information. Just one quick question relative to your debt. How much is that variable rates at the present time? And do you look to fix any of that?

We did fix a nice chunk of it with a convert in May. And so we're about 50/50 which is what we have stated for many years is kind of our goal. Our average interest rate in the quarter was about 3.3%.

3.5. 3 1/2.

About 3.5%. And we've got a good balance between fixed and floating. And my guess is that our debt levels will remain the same or perhaps be up slightly year-over-year depending on cash flow versus acquisition activity. We're looking at a number of smaller product lines. None of which are material in and of themselves, but to the extent we can continue to acquire nice product lines and integrate them to our businesses, we're getting some good growth and certainly some good future earnings growth without putting a lot of capital to work.

Okay. And a question on the convert. I think the trigger price is $22.41.

That's correct.

And that would result in 8 million shares if everything was converted?

That's correct.

Okay, thanks.

And there appear to be no further questions, so, Mr. Sullivan, I will turn the conference back over to you for any additional or closing remarks.

Thank you, Shawna. We hope to see some of you in person on Friday, this Friday at our annual meeting. It is at 2:00 p.m. where we expect to address roughly 1,000 RPM shareholders and with that, I would like to thank everybody for participating in our first quarter conference call and if we don't see you Friday, we will look forward to talking with you at the conclusion of our second quarter. Thank you very much and have a nice day.

That does conclude today's conference call. Once again, we thank you for your participation.